Thursday, June 20, 2013

Sorry, US Government Accountability Office: Linden Dollar, Not Bitcoin, Is Most Widely Circulated Virtual Currency

My pal Andrew Leonard of Salon notes the latest U.S. Government Accountability Office's report to the Senate's Finance committee on the tax implications of virtual currencies, which not only mentions Second Life by name, but lays out an accurate scenario in which an SL content creator would probably have to pay US income taxes (if they're based in the US). Here's the key infographic from the report:

The specter of the IRS casting a shadow over Bitcoin, which the GAO concludes is “the most widely circulated virtual currency available,” is the meat of the report. Just the fact that the U.S. government is starting to pay serious attention to the cryptocurrency surely has libertarians getting nervous.

Emphasis mine. Two things: The IRS has already recommended that people pay taxes on virtual currency earnings in Second Life, like four years ago. More key: This report is totally wrong about Bitcoin's circulation:

Last year, Bitcoin had all of an estimated 15-25,000 users. When I wrote that post, Bitcoin advocates complained that I was underestimating the users, but couldn't offer evidence to contradict it. And even if the total userbase is 10x that highest number, i.e. 250,000, there would still be less Bitcoin users than users of Linden Dollars, which are roughly 400,000-600,000.

My understanding is that tax authorities generally have only taken an interest at the point of cashing out: the actual real-money payment from Linden Labs to the potential taxpayer. Which is at least simple. Things such as Tier would be a business expense anyway.

But I am not an accountant, nor do I play one on TV.

As for Bitcoin v. Linden Dollars, there are several different measures. Bitcoin has the lead in total monetary value (which has jumped up and down a lot over the last year), but the Linden Dollar has the lead in number of users.

There's a huge number of people making a few US dollars a month in Second Life. Are they worth bothering with? Bitcoin, with fewer people and more US Dollars, would be more significant, even without possible black-market use.

On the other hand, as Amazon's Kindle Direct Publishing reveals, a tax system can exploit a computer-based economy of mostly trivial users, and get money from the insignificant. To self-publish through KDP, as a non-American, just getting the necessary TaxID number would cost me more than I am ever likely to earn. (Median Kindle sales are tiny.)